Wednesday, July 18, 2007

RRSP or Pay down your Mortgage

I've noticed several articles written lately one by MoneySense I believe it was the Jan/Feb issue and the other being Canadian Business August issue debating whether it make more sense to pay down your mortgage, when your a younger couple or contribute to your RSP's. Both publications offer excellent points MoneySense to sum it up says pay off your mortgage as it's your largest debt if you can pay it off by your early 40's. Then roll what use to be your mortgage payment into your RSP. Canadian Business basically stands on the point of with today's interest rates your much better investing your money in your RSP and just continue paying your normal mortgage payments and at the end of the year when you file your taxes you'll earn 30 cents on every dollar that your contributed to your RSP's.

Case Study using our family:
Pay off Mortgage first: $81,000
Increase payments by 20% max allowed by mortgage company
Would be paid off within 10 years and 4 months
Savings of $9933.75 in interest
Roll mortgage payment into RSP when the house would be paid off by the time I was 43
Retire at 65 on RSP's calculated at 8% ROI would give us $786861.54

Invest in RSP's at 10% annual salary over the course of 33 years with 8% ROI on RSP's
would give us $786872.33 basically $10 more when I retire
Now if we took the 30 cents on each dollar and paid the mortgage in a lump sum at the end of the year from tax refund it would pay off the mortgage in 10 years and 9 months.
Savings of $9407.79 in interest

For our family we decided to go with pay off the mortgage first for a couple of reasons:
First - were set on a varible rate the more we can take off the principal faster the less were exposed if interest rates jump like they did back in 1979.
Second - it's our largest debt.
Third - you always end up with other plans for your tax refund when it comes around I know we wouldn't end up putting it on the mortgage meaning we would be paying off the mortgage for the full term.

You have to decide what works best for your family there's alot of great calculators out there to figure out your RSP's and Mortgage Amortization run the numbers and find out what works best for you.

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